The Good News About Retirement Savings in Light of the Stock Market Downturn

Your employees have worked hard to save for retirement, but did the coronavirus pandemic wipe out their life savings?

The answer is no — if you’re talking about long-term investments, such as retirement savings.

The trouble with investments began when the S&P 500 index fell by 30 percent during the early days of the coronavirus pandemic as the mandatory business shutdowns occurred. The market is starting to rebound but is not completely recovered.

Here are a few of the reasons retirement account experts are optimistic about the future of retirement savings:

Diversified Portfolio

The Investment Company Institute, a global association of regulated funds, reports that savings in employer-sponsored retirement plans historically don’t dip as much as the general market. One of the reasons is that retirement plans are usually comprised of a well-diversified, balanced mix featuring stocks, bonds, real estate and other investment classes where risk is spread among a variety of different investments. For instance, if the portfolio has real estate and stocks, the real estate investments might be performing well even though stocks might go down.

Another reason for optimism is that employees who have their contributions automatically taken from their paychecks usually don’t disable that feature. That means they are continuing to invest when stock prices are lower. A Bankrate survey indicates that about 49 percent of Americans, both working and unemployed, are still contributing the same amount to their 401(k) plans now as they did before the pandemic hit.

Still Ahead of the Curve

Even with the downturn in the stock market, historically when the market has experienced difficulties it’s later rallied back. The S&P fell by 31 percent from the end of 1999 to the low point in October 2002. In comparison, 401(k) plan balances dipped by 8 percent before recovering completely and even making some gains.

In contrast, the S&P 500 gained 31.5 percent in 2019. That means that anyone who significantly invested in stocks since the beginning of 2019 is probably ahead on their investments. For instance, if you invested $10,000 in the Vanguard Balanced Index Fund on April 30, 2010 (60 percent stocks and 40 percent bonds), your savings would have doubled in 10 years, even with the 2020 downturn.

Social Security

Most middle-income workers and retirees who have less than $1 million in savings are depending on Social Security to provide anywhere from two-thirds to as much as 90 percent of their retirement income.

Fortunately, Social Security benefits don’t go down in value when the stock market does. Social Security payments are backed by the U.S. government, and Social Security payments are included in what federal budget policymakers consider to be mandatory government spending. So Social Security income — which represents a large part of many employees’ total retirement income — is protected. There is, however, concern about the long-term solvency of Social Security. With about $2.9 trillion in its trust funds, Social Security is expected to be able to make full benefit payments until 2034. After that, the trust fund will be mostly depleted and, unless changes are made, payouts will depend entirely on revenue the program collects from payroll taxes and other sources, which will only be enough to pay 75 to 80 percent of benefits.

Next Steps

Regardless of what happens, it makes sense for employees to continue saving and investing for retirement. Experts warn individuals against making hardship withdrawals from retirement savings unless they absolutely need to avoid bankruptcy or eviction.